View full sizeAssociated Press fileA year after becoming CEO, Beth Mooney plans to cut expenses by up to $200 million per year.

Updated at 6:30 p.m.

KeyCorp said Thursday that it plans to cut expenses by closing some branches and cutting jobs by the end of 2013.

The announcement follows a similar move by FirstMerit Corp. two months ago. Together these cutbacks punctuate what has long been predicted: Banks should brace for years of tepid loan growth, low interest rate margins and mounting, costly government regulations.

Key's disclosure came as it reported that second-quarter profits dipped by 5 percent compared with 2011. Fifth Third and Huntington alsoannounced profitable second quarters on Thursday; unlike Key their profits increased.

Key's new effort will be aimed at improving efficiency. Besides cutting between $150 million and $200 million a year in expenses, Key is also looking aggressively at ways to increase revenues, Chairman and CEO Beth Mooney said in an interview Thursday morning.

Survival for banks such as Key, Fifth Third and Huntington will depend on which ones can operate the most efficiently and generate the best returns, said banking analyst Gerard Cassidy of RBC Capital Markets in Maine.

Key plans to close up to 5 percent of its 1,062 branches, or about 50 branches. Of the first wave of 17 branches that will close, none are in Greater Cleveland, and this area isn't expected to be affected significantly by branch closings. And at the same time as branches with much growth potential close, Key will continue to open new branches.

But Mooney realizes that potential job loss will be the big worry for Key's 15,000 employees and the communities such as Cleveland where it's a major employer. Key employs 5,500 in Cleveland.

They company - which employed 25,000 in 12 years ago - doesn't have a number of cuts in mind. But job cuts are expected, Mooney said.

"It's more about how we do work than we have to cut the headcount by x," she said. "We probably over the years have grown duplicate functions."

Some jobs can be combined, she said. Some tasks can be outsourced so that Key doesn't have to employ people full time to handle work demands that may fluctuate.

To ease workers' concern, Mooney held a "town hall" conference call with workers Thursday afternoon and said she planned to take questions from employees.

"If anybody asks, 'Does it mean there will be job impacts?' then I intend to look folks in the eye and say, 'There could be, but let's talk about what that means.' " In some cases, an employee might be offered another open job, she said.

Communication is critical, she said. "We would want to . . . ultimately be fair. I think the more you can be honest and transparent and let them understand the whys and the strategy behind what you're doing, I think that is how you build trust and confidence in that we're doing the right things as a company."

Key also plans to save money by consolidating office space and renting some out. "We're going to do a lot of work around occupancy," Mooney said.

Critical to Key's hopes of being more efficient will be increasing revenue. "You can't ever save yourself rich," Mooney said.

Key will continue to hire people who can help grow the company and the bank will continue to look for new products and services. Key's new head of the commercial payments group hopes to increase revenue at double the normal rate. Key also hopes to expand in its healthcare and energy segments.

Key said its goal is an efficiency ratio of 60 percent to 65 percent, which means it would spend 60 to 65 cents for every $1 of revenue. Currently, its ratio is 69 percent.

Cassidy, the banking analyst, said he's not sure whether 60 to 65 percent is good enough to compete. Competitors such as U.S. Bank and PNC, which already operate more efficiently than Key, should be able to offer better loan interest rates to customers and still make money, Cassidy said.

"You have to commend Key for stepping up and focusing on the expenses," he said. "The industry has to grasp the bull by the horns."

Fifth Third's efficiency ratio is 59 percent; Huntington's is 63 percent currently, and it has a goal of the mid-50s, according to Dan Walsh, president of the Cleveland market of Huntington.

Cassidy noted that there are seven large regional banks in the United States: Key, Fifth Third, Huntington, Regions in Alabama, SunTrust in Atlanta, Comerica in Texas and First Horizon in Tennessee. "In three years, we don't believe all seven will be independent," he said.

Key has posted profits every quarter for more than two years. For the second quarter, profits were $231 million, or 24 cents per share. Profits were fueled by continued loan growing, particularly the commercial, financial and agricultural segment.

At Fifth Third, second-quarter profit was $376 million, or 40 cents per share, up 15 percent from the year-ago quarter. A highlight for Fifth Third: Consumer deposits in Northeast Ohio are up 33 percent from a year ago and commercial lending is up 18 percent, said Jerry Kelsheimer, president and CEO of Fifth Third Bank, Northeastern Ohio.

At Huntington, second-quarter profit was $153 million, or 17 cents per share, up 5 percent from a year ago. In the Cleveland market, the number of households that opened Huntington accounts jumped by 27,000 in the last year, said Walsh. He credits that in part to the company's 2-year-old push to expand branch hours and give 24-hour grace periods on overdrafts.

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